Shares digital

With results thin on the ground this time of year, the Shares team is turning its attention to the deluge of trading updates that are flooding the market

Luminar (LMR) 305p HIT

Full-year figures should meet market forecasts – but there will be little room for error. Trading conditions have weakened since mid November. While there have been fewer customers, those that did frequent its clubs have spent more than average. Stockbroker Numis believes Luminar may not meet earnings forecasts for 2009, saying it will struggle to grow dancing division profits. Share buybacks could cushion a weak share price in the short term, adds Numis.

Shares says: Market confidence in the leisure sector is going to be the main influence on Luminar for the coming months. Negative sentiment means the shares may keep falling. SELL

by: Dan Coatsworth

Econergy International (ECG:AIM) 40.5p HIT

The Latin American-focused independent power producer (IPP) is expanding its portfolio of assets, which should translate in increased revenues at the finals in May. The 50% stake in Corani hydroelectric station in Bolivia is earning the company $21.6 million. In Brazil, two more plants should be brought into commercial operations by the second quarter of this year and another in US will be operational by the end of 2008. The expansion of the wind portfolio is on track, with a new agreement in Costa Rica, and the group’s carbon markets business is also progressing.

Shares says: Power prices are likely to stay high in 2008 and so is interest in green-focused firms. HOLD

by: Carlo Svaluto

HMV (HMV) 105.5p HIT

Trading over Christmas at the music, movies and books retailer was surprisingly encouraging, with strong underlying growth in both music and books (Waterstone’s). The HMV stores enjoyed underlying growth of 14.1%, while Waterstone’s enjoyed like-for-like sales growth of 4%. The exceptionally strong growth by the HMV stores was due in part to a changed sales mix with console games now accounting for some 20% of sales. Waterstone’s may have benefited from difficulties at Borders whose future was uncertain for much of 2007.

Following the better than expected statement Nick Bubb of Pali International increased his current year forecast to £56 million (earnings of 9.7p). For 2008-09 he is forecasting £66 million and earnings of 11.5p.

The internet clearly threatens the long term viability of both Waterstone’s and HMV. However, the company is now developing its own online capability. The group is also trying to alter its sales mix to minimise the impact from the net. The revitalising of the core UK business should also help.

At 106p the shares are on a prospective yield of 7% and are selling on a PER of 10.9, falling to 9.2. Analysts regard the divi as secure.

Shares says: Sentiment should improve. The shares are attractive for income conscious investors. BUY

by: John Marshall

Private & Commercial Finance (PCF) 24p HIT

The specialist lender reported a very strong fourth quarter with new business 86% ahead of 2006, meaning it is on course to meet forecasts. The company gave no detail as to what is driving this growth, but specialist lenders are generally benefiting as the high street banks scale back operations in light of the credit crisis. Given some specialist lenders’ difficulties in securing their own funding, a new £20 million finance facility is welcome news and provides headroom to keep on growing new business.

Shares says: Results will explain what is driving this trading and should point to a good 2008. BUY

by: Simon Keane

Barratt Developments (BDEV) 396p HIT

Barratt seems more upbeat than its peers. A 6% decline in the order book was not as bad as many other struggling house building firms, while a similar fall in sales came after stripping out 500 fewer buy-to-let units. Average selling prices eased 0.9%, due to a change in the mix of types of homes sold.

UBS suggests that the house builder will meet forecasts at the interims on 27 February. Analysts there point out that Barratt's shares fell further than any of its peers, discounting a 30% fall in the value of land. This would only happen if unemployment levels rose significantly and banks started repossessing houses, which seems an extreme scenario.

As to whether Barratt is going to maintain its dividends, analysts are pretty confident that unless the picture gets significantly gloomier, shareholders will get their income, providing an interesting speculative element on recovery given the current 10.5% prospective dividend yield, covered 2.5-times by 2008 forecast earnings of 99p a share.

While the outcome of the spring selling season is still uncertain, it should be remembered that likely interest rate, sooner rather than later, could inject a welcome dose of confidence into home buyers and investors alike.

Shares says: The potential yield may well appeal to the risk-taker, but he volatile nature of the market makes a more cautious stance sensible for now. HOLD

by: Carlo Svaluto

Ashmore (ASHM) 246.8p HIT

Ashmore is one of the few asset managers which has kept performing during these turbulent times. This is because the company is exposed to emerging markets, which on the whole, have been doing very well. The trading update reveals continued strong growth in asset gathering, with the company attracting $2.8 billion in the three months ending 31 December 2007. Given this, and continued strong performance, results should meet expectations.

Shares says: Exposed to emerging markets which are doing well. BUY

by: Simon Keane

Dragon Oil (DGO) 387.5p HIT

Turkmenistan-focused Dragon Oil announced a 56% year-on-year hike in group output for 2007 to an average rate of 31,997 bopd.

And earlier this month it passed a significant milestone in its history – achieving a target of producing 40,000 barrels of oil by 2008. In response the share price rocked up 10%. It has since retreated slightly from record highs of more than 400p.

The increase in production was achieved on the back of six successfully completed development wells offshore Turkmenistan during 2007. Additionally a work-over programme helped achieve an incremental increase in production of more than 2,000 bopd.

Last year also saw Dragon widen its portfolio, farming in to some exploration acreage in the Yemen – a relatively under explored part of the Middle East.

Chairman and CEO Hussain Sultan says: ‘I hope to see Dragon Oil raise production by an additional 25% by the end of 2008, and I am confident that we can continue to capitalise on this success to drive future growth and increase shareholder returns.’

Shares says: At the current price most of the upside looks factored in but, with rising gas and oil prices it might be worth picking up a few more. SPECULATIVE BUY

by: Tom Sieber

Velti (VEL:AIM) 179p HIT

Booming growth in the use of mobile phones for marketing and advertising drove sales up by 75% last year at the mobile phone and software services provider, which continues to broaden its geographic reach, customer base and service offering.

Investment in Ansible, a joint-venture with Interpublic (IPG:NYSE), one of the world's leading advertising and marketing firms, continues apace.

The Greek firm's shares held firm at 179p, below the 228p at which management sold £1.5 million of stock last July and the 210p at which it raised £7.5 million in October, but well above May 2006's 100p flotation price.

Shares says: HOLD

by: Russ Mould

Whatman (WHM) 246p MISS

The weaker US dollar continues to be a hindrance, and although Whatman says revenue for 2007 will be in line with expectations, it won’t be anything spectacular. The group is estimating revenue of £116 million, meaning that on an underlying basis, excluding the effects of foreign exchange, annual revenue will be at the same level as it was the year before. Although the group is making good progress with its restructuring programme and its order book has increased following previous weakness, the group still has a fair way to go. Since the trading update, Whatman has also confirmed it has received several bid approaches.

Shares says: Putting in the work, but investors will need patience. HOLD

by: Rachel Robson

Delta (DLTA) 100p MISS

Although overall trading performance on a pre-exceptional basis for the year ended 31 December 2007 is expected to be in line with expectations, Delta’s electrolytic manganese dioxide (EMD) division continues to suffer losses on the back of difficult market conditions and adverse exchange rates. The group’s EMD facility in Australia has continued to put in a poor performance, prompting the group to cease production at the plant altogether this March, having previously reduced production.

This decision will result in a significant exceptional charge in 2007. Delta’s healthier divisions are Galvanizing Services and Engineered Steel Products, where strong Australian market conditions are providing good volumes and margins. However, large reductions in the price of zinc adversely affected the good performance of AusZinc, its zinc reclamation business, resulting in profits ‘substantially less than the extraordinary profits earned during 2006.’

Going forward, although the Australian economy is expected to remain strong, the group says competitive pressures and inflationary cost increases are likely to challenge margins. Lower zinc prices will also pressure selling prices at its Galvanizing Services business.

Shares says: Challenging market conditions are likely to remain a problem in 2008. AVOID

by: Rachel Robson

Enterprise Inns (ETI) 420.25p MISS

We don’t think Enterprise Inns will hit analyst forecasts. It said EBITDA for the 15 weeks to 12 January was in line with last year, with EPS ahead. But there is a cautious outlook.

Stockbroker Numis said its forecasts were under pressure and downgraded its rating to ‘add’ from ‘buy’. It had forecast 3% growth, but notes Enterprise Inns’ statement that market conditions would remain difficult for some time.

While the company insisted it wasn’t experiencing any material deterioration in the main indicators of its licensees’ financial health, there is a nasty feeling that unless the UK has a sunny summer, pubs aren’t going to see a notable uplift in customer numbers.

Numis said its £290.9 million pre-tax profit forecast for the year to September 2008 could come down by 5% if trading conditions do not improve in the spring.

Analyst Kate Pettern from Landsbanki says flat EBITDA could mean Enterprise has seen a drop in profit, because its estate has up to 2% more trading pubs than a year ago.

Shares says: Improving value now depends on converting to REIT status. HOLD

by: Dan Coatsworth

Woolworths (WLW) 8.23p MISS

The shares failed to react to the better than expected trading update. Although the group indicated that its stores would make a modest profit that is the result of property profits rather than a retailing recovery. The dilemma facing investors was well summarised by Rhys Williams of Arbuthnot who thinks ‘the shares are cheap but would not recommend anyone to buy them’.

The 20% yield indicates that market believes that the divi is unsustainable. Although Baugur has a long standing 10% stake most analysts believe that it will not bid, although an analyst, who preferred anonymity, did describe Baugur as ‘crazy boys who might do anything’.

Shares says: One of the least popular retailers, and with good reason. AVOID

by: John Marshall

Venture Production (VPC) 683p MISS

North Sea-focused Venture has downgraded 2007 production estimates three times and it has now taken between 15% and 20% off its expectations for 2008 and 2009.

This most recent update caused the stock to dive down 16% and, while the company is aiming for production of 100,000 bopd by 2011, recent delays and cancellations to development work mean this is more likely to be achieved through the company's focus on corporate activity rather than organic growth. Its aim of leading consolidation on the UK continental shelf looks more challenging against the competitive environment fostered by high oil prices – although this might equally make the firm a bid target.

Shares says: Despite the recent weakness there is no obvious catalyst at present to spur a rally. HOLD

by: Tom Sieber

i-mate (IMTE:AIM) 20.75p

Last summer, the smartphone specialist's chief executive Jim Morrison told Shares (14 June’07): 'The first half will not be pretty but we will be able to give a strong indication of what we expect for the second half. If there's no improvement, we might as well pack up and go home.'

December saw the Dubai-based firm publish a first-half loss and last week's profit warning for the second half prompted Morrison to admit: 'We have no alternative but to review the strategic options for the company at this time.'

Last year's strategic review and launch of the Ultimate product range raised hopes for a recovery. But a key silicon chip supplier, thought to be America's Qualcomm (QCOM:NDQ), has now failed to provide sufficient volume.

A recent patent infringement litigation against the same supplier is also likely to hamper the £24 million cap's ability to sell certain products in the US, resulting in lost sales and further cost write-offs.

The shares slumped 38% to a new all-time low of 20.75p.

Shares says: A bid looks the only way out despite a net cash pile. HOLD

by: Russ Mould